LOS c: Estimate the market value of a real estate investment using the direct income capitalization approach and the gross income multiplier technique.

Q1. Assume that a property has a gross annual income equal to $150,000, and that comparable properties have a gross income multiplier equal to 11.25. The gross income multiplier approach provides a market value for this property that is closest to:

A)   $1,687,500.

B)   $1,625,000.

C)   $1,333,333.

Q2. Assume that a property has an estimated net operating income (NOI) equal to $150,000. Further assume that comparable properties have a capitalization rate of 11%. The direct income capitalization approach provides a market value for this property that is closest to:

A)   $13,636,363.

B)   $1,500,000.

C)   $1,363,636.

Q3. Anthony Chung, CFA, works in the Hong Kong office of Eurasia Commerce Bank (ECB). One of his clients is North Sea Shipping (North Sea), a European firm that is interested in purchasing a warehouse in Kowloon, a densely populated region that, for decades, has served as one of the major docking, transfer and storage areas for Hong Kong’s enormous international trade activities. Although North Sea’s storage requirements are intermittent, management believes the warehouse would provide immediate access to space should the need arise, as well as a stable income stream.

The property under consideration is Kowloon Container Center (KCC). The KCC facility is well-situated in the center of the transportation and industrial district and meets North Sea’s size specifications. It is fifteen years old. Chung has assembled the following information on KCC and some appropriate comparables (X, Y, Z):

Table 1: Kowloon Container Center: Valuation Data

Current exchange rates:
US$1 = HK8
EUR1 = US$1.337

The warehouse acquisition is not the only transaction Chung is working on for North Sea. The firm has already signed a contract to buy a condominium on Victoria Peak for its CEO Magnus Thorsson. Thorsson frequently conducts business in Hong Kong; he also uses the city as a base for numerous trips to Singapore and mainland China. North Sea’s management team and Board of Directors believes the condominium will not only enhance the company’s ability to do business in the region, but will appreciate rapidly due to Hong Kong’s strong economy.

The purchase price of the condominium is HK 32,100,000. In deference to North Sea’s longstanding relationship with the bank, Chung has arranged for ECB to issue an interest-only loan for 95% of the purchase price. The loan terms are 8% for 15 years with monthly payments. ECB is requiring a sinking fund due to the low equity investment. North Sea’s equity dividend rate is 18%.

Thorsson is concerned about North Sea’s currency exposure during the thirty days before settlement. He tells Chung, ”I want to lock in the current exchange rate if possible. I know we will be able to come up with the